Risk Trade Gets Crushed

The Dow has turn into the red, putting the index on track for its third-straight losing session, but it’s not the most eye opening move in the capital markets today. You can literally see the risk-off trade batter markets from one side of the globe to the other.

The dollar is falling sharply against the yen and euro, as traders deal with disappointment over reform proposals from Japanese Prime Minister Shinzo Abe, and were apparently encouraged by comments from ECB President Mario Draghi, even as the central bank cut its euro-zone GDP forecast for 2013.

Meanwhile, the yield on the U.S. 10-year Treasury note dropped from a high of 2.13% this morning to as low as 2.01% in the early afternoon. Indeed, according to Bloomberg, the yield went as low as 1.99%, albeit lately it’s back around 2.05%. An even bigger move is occurring in the Japanese yen. The dollar plunged from a high Thursday of 99.45 to a low of 95.88, roughly a 3% move. It’s currently around 97.10.

Abe’s highly anticipated economic reform proposals were viewed as too vague by the markets, and it’s becoming clear investors overran what the prime minister could deliver. The Nikkei is down nearly 20% in just two weeks.

The move in the euro — it rose about 1.4% against the dollar, to over 1.33 – is curious to us, since European stocks all slipped into the red after what we took as a drab Draghi press conference. While maintaining his standard line about doing whatever’s needed in terms of aiding the economy, he didn’t actually announce any new measures, and at the same time Europe’s central bank cut its forecast for the economy this year.

With the Nikkei down another 0.8% overnight, and European stocks down, U.S. stocks have followed suit. The Dow rose tepidly at the open, but has since slipped into the red, down about 0.6% and off more than 100 at its low. The S&P 500 is down 5, or 0.3%, at 1604, and briefly traded under the 1600 mark. The Nasdaq Comp is down 17 points.

The S&P 500 is currently down a bit more than 4% from its May 21 closing high. The index has not seen a 5% of greater drop since November.

If the Dow closes lower, it would be its third-straight losing session. The index has not had a three-day losing streak this year.